Last week was a strong one for commodities in general, a Credit Suisse report notes. However, there was one oddity out of China that sent prices lower on Friday, particularly in the futures market. While steel was higher, it was the stainless steel – which has different economic performance drivers than does coiled steel – might be where real value is found. While trends have been lower in iron ore, that market could look higher three months from now as zinc, which has seen higher prices since June, might be due for mean reversion. Market supply and demand could be impacted in the week ahead as China, a leading demand force, has stated it plans on reducing iron and coal imports from vulnerable North Korea in the wake of a standoff with the US.

Stainless Steel prices - The world's leader in planned economic outcomes notes a supply and demand imbalance

It might seem odd that China, a remaining world economy that is based on a significant degree of market planning, was noting that influences not related to the supply and demand continuum were at work influencing steel prices.

In the wake of generally rising commodity prices throughout the week, it was the China Iron and Steel Association that put a damper on the party Friday. That’s when it said the recent run-up in steel prices was “not driven by market demand or reduced market supply,” Credit Suisse’s Global Metals and Mining Weekly report observed.

The fact that is indisputable is that Chinese iron ore imports are down 9% month over month and 2% year over year, coalescing with a deleveraging trend sweeping across the world’s second largest economy. There is a dichotomy, however, as on a year to date basis July imports are up 7%.

Despite Chinese utterances on Friday, iron ore was up nearly 5% over the week at a time port inventory fell 1.3%. Credit Suisse projects iron ore price trends to be higher on a one-month and three-month basis. The supply / demand impact of a potential boycott of North Korean metals has yet to be determined, a formula complicated by an estimated $6 trillion in untapped supply.

Credit Suisse likes Stainless steel prices relative value mean reversion

Credit Suisse’s key theme was a positive outlook on Stainless steel prices.

Because it is generally corrosion resistant, stainless steel is used in a variety of common household products such as cutlery and cookware, while it is also found in door and window fittings among a number of consumer usages. On an industrial level, it is found in exhaust systems, in surgical instruments and water tubing among a host of applications that require resistance to not only water but various degrees of acidic compounds.

Looking at technical factors, the Credit Suisse analysis considers a relative value price divergence. Stainless steel prices have underperformed carbon steels “materially” since June by nearly 20%, a significant mean divergence. The report attributes such a significant price differential mostly to the fundamental factor of Chinese destocking.

The move didn’t just impact the Asian region as price weakness spread to the US and the European Union as well.

Credit Suisse calls this a “new cycle” and, while determining trend magnitude and mean reversion timing is difficult, they are looking for a price recalibration to occur following a year change.

Inventories are low in the US despite the price drop, meaning a restocking is in the cards at some point given a reasonably consistent macroeconomic outlook. And that isn’t the only market that could see a rebound. China is also likely to engage in restocking eventually. Plan ahead, Credit Suisse advises clients, and the trend pattern will likely re-emerge.

The report also noted positive one-month trends in zinc SHFE exchange inventory but potential headwinds on a three-month basis, while noting Comex copper has been strong year to date but the trend may remain positive but gradually decrease on a one- and three-month basis.